Cayman Islands: Limited Liability Companies In The Cayman Islands

On 8 July 2016, the Limited Liability Companies Law, 2016
(LLC Law) came into force in the Cayman
Islands. The LLC Law introduces a new type of corporate vehicle in
the Cayman Islands, the limited liability company
(LLC), which is closely aligned with the
Delaware limited liability company. This Guide sets out the key
features of LLCs and how they can be formed.

General

Nature of an LLC

An LLC is a body corporate, with limited liability, which may be
formed for any lawful purpose. LLCs are capable of exercising all
the functions of a natural person.

Under the LLC Law, and unlike the position in Delaware, the
member(s) must have an LLC agreement. However, the good news is
that although the LLC Law contains numerous default positions which
apply in the absence of express agreement, it also provides great
flexibility to members of an LLC to regulate their relationship in
their LLC agreement. Unless its LLC agreement provides otherwise,
an LLC has the power to do all things necessary or convenient to
carry on its business.

Separate legal personality

A key feature of LLCs is that, like Cayman Islands exempted
companies but unlike Cayman Islands exempted limited partnerships,
an LLC has separate legal personality from its members. An LLC must
have at least one member and there are no Cayman Islands residency
requirements for members.

Taxation

LLCs are exempt from any Cayman Islands income or gains taxes
and can obtain a tax undertaking certificate from the Cayman
Islands government guaranteeing no change to their tax status for a
period of up to 50 years from the date of the undertaking.

Application of related Cayman Islands laws

The LLC Law provides for the application of other Cayman Islands
laws to LLCs, so that LLCs are automatically incorporated into:

The Mutual Funds Law (Revised), allowing an LLC to be
structured as a mutual fund

The Exempted Limited Partnership Law (Revised), so that an LLC
can be formed to act as a general partner of an exempted limited
partnership and

The Securities Investment Business Law (Revised) so that an LLC
can be formed to act as an investment manager or investment advisor
to a mutual fund or general partner of an exempted limited
partnership

The LLC Law also preserves the rules of equity and common law,
to the extent they are consistent with the LLC Law.

Establishment and operation of an LLC

Registration

An LLC can be registered by paying a fee and filing a
registration statement with the Registrar of LLCs (the
Registrar), signed by the person(s)
forming the LLC and setting out:

The name of the LLC

The address of its registered office in the Cayman Islands

If the LLC is not formed for an unlimited duration, the term
for which it is formed and

A declaration that the LLC will not undertake business with the
public in the Cayman Islands other than as necessary for carrying
on its business outside Cayman

On registration, the Registrar will issue a certificate of
registration for the LLC. Any amendments to the details set out on
the registration statement must be filed with the Registrar within
30 days of the change together with the applicable filing fee.

Name

An LLC may, but is not required to, include in its name the
words "Limited Liability Company", "LLC" or
"L.L.C.". The name may also be preceded by or followed
with a dual foreign name. No other company or entity registered
under the Cayman Islands Companies Law may use these words or
abbreviations in its name, unless it is registered as a foreign
company under the Companies Law or is an existing entity that is
currently using one of these words or abbreviations in its
name.

LLC agreement

As noted above, members are required to enter into an LLC
agreement governed by Cayman Islands law to regulate the conduct
and business of the LLC. Members are free, however, to agree
amongst themselves the internal rules and regulations, subject to
appropriate minimum safeguards. The LLC agreement is not required
to be filed or registered with the Registrar and LLCs do not have
to sign the LLC agreement, although they are bound by its
terms.

If a third party signs the LLC agreement, they are not deemed to
be a member of the LLC if they executed the agreement solely to
take the benefit of a provision of, or assume an obligation under
it, or where, on proper construction of the LLC Agreement, the
parties did not intend that person to be a member of the LLC.

Management

The LLC Law provides for management powers to be vested in
members acting by a majority in number or alternatively in one or
more managers, as set out in the LLC agreement. As is the case for
members, there are no Cayman Islands residency requirements for
managers. The members or manager(s) do not owe any fiduciary duties
to the LLC or any member or other person except, in the case of
manager(s), a duty of good faith, which can be expanded or
restricted by the express provisions of the LLC agreement.

A manager of an LLC may also, but is not required to, be a
member of the LLC and the LLC agreement may provide for different
classes of managers with varying rights, powers and duties, with
voting allowed on a per capita, number, financial interest, class,
group or any other basis.

Members and classes of interests

There must be at least one member of an LLC at all times.

An LLC may issue an LLC interest to a proposed member in
accordance with the terms of the LLC agreement, or if the LLC
agreement is silent then with the consent of all members and on the
member's admission being reflected in the records of the LLC.
Unless the LLC agreement provides otherwise, members have no
pre-emptive right to subscribe for LLC interests on further issues.
The LLC Law also provides for the creation of classes of member /
interest, with varying rights, powers and duties.

LLC interests may be transferred, on the terms set out in the
LLC agreement or, if the LLC agreement is silent, the assignee may
become a member with the approval of all of the members of the LLC.
Subject to the LLC agreement, a member's right to receive any
payments or distributions of an LLC interest are also capable of
assignment.

An LLC may, but does not have to, issue a certificate of LLC
interests to its members. As is the case now with exempted
companies, bearer interests cannot be issued.

Subject to the terms of the LLC agreement, any matter to be
voted on by members may be approved by consent in writing signed by
members having sufficient votes necessary to authorise the matter
at a meeting of the members. Unless otherwise provided in the LLC
agreement or the LLC Law, votes of members are passed by a simple
majority in number of the members entitled to vote on the
matter.

Negative consent

The LLC Law also allows LLC agreements to include negative
consent mechanisms under which a member is deemed to have consented
to a matter if notice with sufficient detail of the matter has been
given to the member and the member does not respond.

Limited liability

The liability of a member to contribute to the assets of an LLC
is limited to the amount that the member has agreed to contribute
to the LLC's assets, any other payments as set out in the LLC
agreement and such other payments or return of property as are
required under the LLC agreement or the LLC Law (see
Distributions below).

Distributions

The LLC agreement may provide for distributions to be paid in
cash or in kind. An LLC may not declare or pay a distribution to a
member or release a member from any obligation to the LLC to the
extent that at the time of the distribution the LLC is unable to
pay its debts as they fall due in the ordinary course of business,
including where the distribution would cause the LLC to be unable
to pay its debts.

A member who receives a distribution from an LLC in breach of
this provision and who had actual knowledge that the distribution
would be in breach, is liable to the LLC for the amount of the
distribution or for performance of the obligation released.

Ongoing obligations of LLCs

Annual requirements

As is the case with exempted companies and exempted limited
partnerships, LLCs are required to make an annual return to the
Registrar in January each year confirming compliance with the LLC
Law and to pay an annual return fee. The annual return will
generally be signed on behalf of the LLC by the registered office
service provider.

Redemptions and repurchases of LLC interests

Unless the LLC agreement provides otherwise, an LLC may acquire
or redeem an LLC interest of a member, provided that immediately
following the acquisition, the LLC shall be able to pay its debts
as they fall due in the ordinary course of business.

Withdrawal of interests

Subject to the terms of the LLC agreement or with the consent of
all the other members, LLC interests are capable of withdrawal on
demand by notice from members.

Just as is the case with other forms of Cayman Islands vehicles,
if an LLC is set up for the purpose of pooling investor money and
issues interests which are capable of withdrawal by investors on
demand, then it will potentially be subject to regulation as a
'mutual fund' under the Mutual Funds Law and may be
required to register as such with the Cayman Islands Monetary
Authority. Please see our Guide to Investment Funds in the Cayman
Islands for more information about investment funds.

Statutory registers

An LLC must maintain:

A register of members

A register of contributions

A register of managers

A register of security interests over LLC interests and

A register of mortgages and charges

Register of members

The register of members must contain the name and address of
each member and the date on which they became and ceased to be a
member. The register must be updated within 21 days of any change.
If the register is not kept at the registered office, the LLC must
maintain (at the registered office address) a record of the address
where it is held and update that record within 21 days of any
change. The register is open to inspection by those persons
expressly allowed in the LLC agreement and as otherwise permitted
by the manager and the LLC must also make it available to the
Cayman Islands Tax Information Authority
(TIA), on notice.

Record of contributions

The record of contributions must contain a record of the amount
and date of the contribution of each member and the amount and date
of any payment representing a distribution or return of all or any
part of the contribution. The record must be updated within 21 days
of any change. If the record is not kept at the registered office,
it must be made available to the TIA at the registered office, on
notice.

Register of managers

The register of managers must be maintained at the LLC's
registered office in the Cayman Islands and must contain the name
and address of each manager. The register is not open to public
inspection but must be updated and filed with the Registrar within
60 days of any change to the details set out in it.

Register of security interests

Any security interest that a member grants over its LLC interest
(subject to relevant consents as may be required in the LLC
agreement) has priority according to the time that the written
notice of the security interest, signed by each of the secured
party and the relevant member, is validly served at the registered
office of the LLC. The notice must specify the agreement under
which the security was granted, including its date and parties, the
identity of the grantor and grantee of the security interest and
the LLC interest or part interest that is subject to the
security.

The register of security interests must be maintained at the
LLC's registered office and must contain details of any notice
of security interest granted over an LLC interest. The register
does not need to be filed with the Registrar and must be updated
within 21 days of receipt of a notice and is open to inspection by
any person expressly allowed in the LLC agreement or permitted by
the manager.

Register of mortgages and charges

The register of mortgages and charges over LLC property must be
maintained at the LLC's registered office and must include a
short description of the property mortgaged or charged, the amount
of charge created and the name of the person entitled to the charge
and must be updated within 21 days of any change. The register does
not need to be filed with the Registrar and is open to inspection
by any creditor or member of the LLC at all reasonable times.

Accounts

An LLC must maintain accounts, including, where relevant,
underlying documentation including contracts and invoices, with
respect to all sums of money received and paid by the LLC, all
sales and purchases of goods by the LLC and the assets and
liabilities of the LLC.

The accounts must give a true and fair view of the business and
financial condition of the LLC and explain its transactions and be
kept for at least 5 years. Copies of the accounts must be made
available to the TIA at the LLC's registered office, on notice,
if they are not maintained at the registered office.

Access to information

Unless the LLC agreement provides otherwise, each member and
manager has the right to inspect the following information, from
time to time for any purpose reasonably related to the member's
/ manager's interest, by notice in writing to the LLC:

True and full information on the state of the business and
financial condition of the LLC

The name and last known address of each manager

A copy of the LLC agreement, registration statement,
certificate of registration and all amendments made and

True and full information on the amount of cash and agreed
value of any other property or services contributed / agreed to be
contributed by each member and the date such member became a
member

A manager also has the right (subject to the terms of the LLC
agreement) to keep confidential from members or managers of other
classes of LLC interests, any information which the manager
reasonably believes is a trade secret or the disclosure of which
the manager in good faith believes is not in the best interests of
the LLC to disclose or which the LLC is required by law or
agreement with a third party to keep confidential.

Conversion, migration, reconstructions and mergers

The LLC Law provides mechanisms for exempted companies to
convert into LLCs (provided the company is not a segregated
portfolio company), a foreign entity with separate legal
personality to apply to migrate into the Cayman Islands as an LLC
and LLCs to migrate out of the Cayman Islands to another
jurisdiction. The LLC Law also provides for reconstructions and
amalgamations by LLCs and mergers and consolidation of LLCs with
other LLCs, with exempted companies (other than segregated
portfolio companies) and with foreign entities which have separate
legal personality, in each case in a similar manner to the
equivalent provisions for exempted companies under the Companies
Law.

Winding up and liquidation

An LLC may be wound up voluntarily:

When the term, if any, fixed for the duration of the LLC in its
LLC agreement expires

Because a specific event has occurred, on the occurrence of
which the LLC agreement provides that the LLC shall be wound
up

At any time when the LLC has no members, note however that the
death of the sole or last member of an LLC does not cause the LLC
to be wound up and the personal representative is deemed to be a
member or

On the vote or written consent of at least two-thirds in number
of the members of the LLC, provided that the LLC agreement may
expressly disapply this requirement or provide for an alternative
vote or written consent

An LLC may also be wound up compulsorily by the Grand Court of
the Cayman Islands or under the court's supervision.

Uses of LLCs

We expect that LLCs will be popular for investment fund and
private equity structures, as well as corporate transactions,
including joint ventures, special purpose vehicles and holding
companies. As noted above, the LLC Law gives great flexibility to
the members of an LLC to regulate their relationship through the
LLC agreement and in that respect is very similar to an exempted
limited partnership. Therefore, the LLC structure lends itself
particularly well to situations where a corporate vehicle would be
preferred but the parties want the flexibility that would
ordinarily only have been offered with exempted limited
partnerships. They will be of particular interest to US based
clients who want to establish offshore vehicles that mirror their
current onshore Delaware LLCs, for example general partners of
limited partnerships.

As noted, because an LLC's member operators or manager(s) do
not owe any fiduciary duties to the LLC (aside from the
manager's duty of good faith), the LLC is also expected to be
attractive to the private equity industry, private wealth and
family offices and venture capital promoters who are looking for an
alternative corporate structure where the participants can operate
a structure whose responsibility and liability can be determined by
express agreement without the traditional burden of fiduciary
responsibilities and associated liabilities of directors of a
company.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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